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2d 351
56 USLW 2164, Fed. Sec. L. Rep. P 93,363
Dr. and Mrs. Morgan B. Raiford brought separate suits in the United States
District Court for the Northern District of Georgia alleging, among other
causes of action, that the defendants violated Sec. 5 of the Securities Act of
1933, 15 U.S.C. Sec. 77e, by selling securities for which a registration
statement was not in effect. The plaintiffs sought rescission of their purchase
The Raifords maintained separate securities accounts with the Atlanta office of
Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch). Thomas F.
Morris, a vice president with Merrill Lynch, acted as the Raifords' account
manager and advisor. In early 1981, Merrill Lynch became the placement agent
for a program offered by BusLease, Inc. known as the "Intercity Bus
Management Program 81-1" (Program). Investors in the Program purchased
forty-foot intercity buses from the manufacturer pursuant to arrangements made
by BusLease. Although the investors were the nominal owners of the buses,
BusLease, under a Management Agreement, undertook to handle the leasing,
maintenance and all other aspects of the ownership of the buses. The investors
shared pro rata in the profits and liabilities of the bus fleet managed by
BusLease. Because BusLease intended that the Program meet the requirements
of the private placement exemption,1 no registration statement was filed with
the Securities Exchange Commission.
the document, he denies electing the provision stating that the purchase of the
securities would be paid for by a deduction of $315,000.00 from each of the
Raifords' securities accounts. The parties agree, however, that the Purchaser's
Representations and Undertakings was completed while in the possession of
Merrill Lynch.
5
On May 25, 1982, Dr. and Mrs. Raiford filed substantially identical complaints
in federal district court. The cases were subsequently consolidated. The original
complaints alleged violations of section 5 of the Securities Act, 15 U.S.C. Sec.
77e, and sought rescission of the transaction and recovery of the consideration
paid pursuant to the provisions of section 12 of the Securities Act, 15 U.S.C.
Sec. 77l. Count Two complained of breach of fiduciary duty and fraud under
Georgia law. The complaints were amended to add a third count stating a cause
of action under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.
Sec. 78j(b), and Rule 10b-5.2 In June, 1985, the court granted the defendants'
motion for partial summary judgment as to Count One of the complaint. The
court ruled that the claims asserted under section 12(1) in Count One were
barred by the one-year limitation period mandated by section 13 of the
Securities Act. Finding that the date of contract constituted the sale triggering
the running of the statute of limitations, the district court determined that such
an agreement became binding on the parties on May 20, 1981 when BusLease
accepted the subscription documents signed by the Raifords The court reasoned
that BusLease could have maintained an action for breach of contract against
the plaintiffs on that date and hence the rescission action brought by the
plaintiffs on May 25, 1982 was barred by section 13.
On appeal, the Raifords do not dispute that the date of a valid contract
constitutes a sale for the purposes of section 5. Rather, they contend that no
such binding commitment was effective on May 20, 1981 because BusLease
had actual and imputed knowledge through their agent Merrill Lynch that the
subscription documents did not reflect the offer made to Morris, acting as dual
agent in the transaction, because that offer was expressly conditioned upon
securing a full bank loan for the purchase price. The defendants reply that if
such an agreement between the Raifords and Morris did exist, the contract
created by BusLease' acceptance of the subscription documents may be
voidable for fraud, but nevertheless triggered the statute of limitations on the
rescission action. For the reasons set forth below, the resolution of the contract
issues raised by the parties is irrelevant to our decision in this case.
8
Section 12(1) of the Securities Act stipulates that any person who offers or sells
an unregistered security in violation of section 5 of the Act shall be liable to the
purchaser upon tender of the security, for the consideration paid plus interest,
less the amount of any income received from the security. Section 13 of the
Act, in part, provides: "No actions shall be maintained ... to enforce a liability
created under [12(1) ], unless brought within one year after the violation upon
which it is based." Thus, the prohibition on selling unregistered securities is
actually contained in Sec. 5(a) of the 1933 Act. Section 12(1) merely provides a
remedy for a violation of that section by authorizing recovery in a civil action
against any person who offers or sells a security in contravention of section
5(a). The statute of limitations continued in section 13 begins running on the
date of the act prohibited by section 5(a).
10
The district court cited no authority in support of its conclusion that the date of
contract was indeed the date of the sale which purportedly infringed on section
5. We glean from the pleadings and briefs in this case, however, that the court
followed the "commitment doctrine" approach developed by the Second Circuit
Court of Appeals in Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 890
(2d Cir.1972). Although this doctrine was formulated to determine when the
sale of a security takes place for purposes of a Rule 10b-5 action, a number of
district courts have engrafted its precepts onto a cause of action brought
pursuant to section 12(1). See e.g., Eriksson v. Galvin, 484 F.Supp. 1108, 1119
(S.D.N.Y.1980); Rochambeau v. Brent Exploration, Inc., 79 F.R.D. 381, 384
(D.Colo.1978). Under this view, the relevant date of the sale of a security is the
time when the parties enter into an agreement evincing a commitment to the
transaction, not when the securities or the purchase price actually change hands.
12
13
The Securities Act of 1933 must be interpreted broadly by the courts in order to
15
Section 4 of the Securities Act of 1933, 15 U.S.C. Sec. 77d provides in relevant
part:
The provisions of Section 5 shall not apply to--
....
(2) transactions by an issuer not involving any public offering.
2
Early in the litigation the defendants moved to refer the state claims to
arbitration as required by Customer Agreements signed by the plaintiffs and to
stay the federal securities causes of action pending a resolution of the
arbitration. The district court found that the state and federal claims were
intertwined so as to make it impracticable to separate out non-arbitrable federal
violations of the Securities Act of 1933 from arbitrable claims and therefore
denied the defendants' motion. On appeal, we affirmed based on the continued
viability of the intertwining doctrine in this circuit. Raiford v. BusLease, Inc.,
745 F.2d 1419 (11th Cir.1984). Soon after this decision, however, the Supreme
Court rejected this doctrine, Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213,
105 S.Ct. 1238, 84 L.Ed.2d 158 (1985) and the defendants renewed their
motion. The district court stayed proceedings as to Counts II and III of the
plaintiffs' complaints pending arbitration. The court's disposition of Count I
forms the basis of this appeal